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Dec 8, 2011

Interest rate rituals and Christmas

Here we go again. A year on, we're having the same debate about banking regulation.

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You may be forgiven for being confused about what year it is. It was almost exactly a year ago that we were engaged in a debate about the big banks and how they pass on interest rate changes.

Back then, it was the big four passing on higher interest rate rises than the RBA was dishing out. Now its their — for the moment — refusal to pass on the latest cut.

There’s plenty of ritual in all this. Wayne Swan attacks the banks. The opposition attacks Swan, and suggests that somehow — without precisely saying what — that he should be doing more to force the banks to do the right thing. The proximity of Christmas means that, yet again, the media can invoke Scrooge. The Bankers’ Association runs the same lies about cost of borrowing. Yawn.

As Glenn Dyer noted yesterday, we’re usually missing half the debate. Most of us don’t reduce our mortgage repayments when interest rates fall, so the impacts on demand and areas like retailing are limited (this is the great, overlooked flaw in the arguments of those who believe monetary policy can do the “heavy lifting” of stimulating the Australian economy in the event of another financial crisis). And the media ignores the interests of savers, who stand to lose from falling interest rates.

There’s also the simple reality that the RBA takes into account the willingness of banks to pass on rate cuts or rate rises in its decision-making. If the banks decided not to pass on any of Tuesday’s rate cut, it’ll keep cutting rates until they do, just as it took into account banks lifting rates higher than its own increases in 2010.

Instead, the real impact of the banks’ failure to pass on any cuts is on business lending, which directly affects business activity and employment. But that, too, gets ignored by the media in favour of focusing on household mortgages.

The more frustrating aspect of the debate is that it reprises exactly the issues that Joe Hockey correctly raised in 2010 and which ended up going nowhere — the need for an inquiry into the financial system and a resolution to the basic issue that banks have the role of utilities but are regulated like normal corporations. The government successfully deflected Hockey’s well-timed push for a re-examination of financial sector regulation with a limited set of reforms aimed at improving competition, but nothing that was going to cause the big four to lose any sleep — or any of their super-profits.

In truth, if people end up with the impression that Swan has been somehow remiss in his responsibilities as Treasurer by not being to jawbone the big banks into cutting rates as much as possible, responsibility for that lies with Swan himself. He had the chance to exploit a normally reflexively negative opposition’s readiness to pursue financial regulation reform last year and preferred to ring-fence the banks from serious scrutiny. The big banks remain a protected species.

The government can’t complain when they take advantage of that.

Bernard Keane — Politics Editor

Bernard Keane

Politics Editor

Bernard Keane is Crikey’s political editor. Before that he was Crikey’s Canberra press gallery correspondent, covering politics, national security and economics.

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9 thoughts on “Interest rate rituals and Christmas

  1. Jim Reiher

    Unless my memory is failing, I am sure that banks always followed the ups and the downs of the reserve bank movements, until the first interest change after Rudd won office. It is a very new game plan – only 4 years old in fact – that allows the big banks to not pass on all of an interest rate cut. Or pass on more than an interest rate rise.

    Why did it change? What happened in late 2007 to change the way it had worked till then?

    And being as old as I am, I can still remember when the Reserve Bank was given the power to set the interest rates. It used to be in the hands of the govt of the day. It was in the hands of the govt of the day for decades and decades. And then suddenly, it became “absolutely necessary” for politicians to no longer have that power, but to hand it over to the unelected leaders of the Reserve Bank.

    Oh I remember (and we still hear) the argument: govts might use interest rates as a vote buying ploy in election years: lower the rates and make everyone happier – but then, if it was a bad idea, they would have to come back later and raise them again.

    sure sure… heard it all before. Of course govts did that! Just like they give tax cuts before elections. It can be and was used that way. But think about it: no one to my knowledge says that Treasury should determine tax rates in the community – for the sake of the economy – they could go up or down one month to the next… to give the economy more flexibility and stability!

    I hate that the Reserve Bank sets the rates. But if that must be the case, then I hate it even more that there is no legislation to make the other banks follow exactly the rate that goes up or down.

    Here is a suggestion: If a bank does not lower the amount by the full amount, then the next time there is a rise in interest rates, they should not be allowed to raise it by the full amount either. They should not be permitted to have it both ways. So here is my suggestion: LEGISTATE TO MAKE IT SO! You know: governments are elected by the people for the people… they can legislate and make rules.

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